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Amazon.com (AMZN) on Tuesday fired its first shot across Netflix's bow. Actually it was more like 5,000 shots, in the form of streaming movies and television shows available at no additional cost for members of its Amazon Prime shipping service.

The $79-a-year service, which gives members unlimited free two-day shipping on many Amazon items, now also entitles members to unlimited streaming from an inventory of more than 5,000 movies and shows, Amazon says. "The Girl With the Dragon Tattoo" trilogy and "March of the Penguins" are among the available titles.

Amazon already sells and rents more than 90,000 digital titles, and rumors that it would launch a new video-on-demand service have been bubbling for the past few months. Last month, the company said it would acquire European distributor Lovefilm, a subscription game and video service with nearly 1.6 million members in the U.K., Germany, Sweden, Denmark and Norway.

Testing the Waters

It's too early to know whether Amazon is waging a full-fledged war on Netflix, So far, Amazon's Prime instant-video inventory only amounts to about one quarter of the more than 20,000 titles that Netflix offers customers on its unlimited-videostreaming subscription plan, which costs about $96 a year. Also, many of Amazon's "free" videos are older movies, which may signal that Amazon.com is merely dipping its toe into the market.

"Looking at the content that Amazon initially has and knowing that Netflix has locked up key content for a while, I believe it would be tough for Amazon to compete on that front, even if their annual price is a little bit cheaper," says Merriman Capital analyst Eric Wold, who covers Netflix. "And it is unlikely that Amazon would spend a ton on additional content until they are sure the subscribers will be there."

Still, the announcement does put Netflix on notice that it may face additional competition over the next few years as some of its exclusive content agreements with studios and other content providers expire. And the move also hints that Amazon may be expanding its commitment to digital movie delivery.

Industry watchers have speculated that Amazon or Hulu could end up partnering with Coinstar's (CSTR) Redbox, a movie-kiosk operator that is planning its own instant viewing service. Redbox has said it that would announce a partner for its new service sometime this year, but hasn't yet mentioned any possible companies.

With $9 billion in cash and a $77 billion market value -- seven times the size of Netflix -- Amazon is well positioned to invest in digital content delivery if it wants to get into the game. And as more viewers watch movies on their laptops and on network-enabled televisions, the videostreaming market may be growing more attractive.

Investors Shy Away from Competition

Americans spent $2.5 billion on digital movie rentals last year, compared to less than $1 billion in 2005, according to Los Angeles-based Digital Entertainment Group. Meanwhile, rentals of packaged media, such as DVDs and Blu-ray disks, fell to about $16 billion from $19 billion during the same time period.

Meanwhile, the Consumer Electronics Association forecasts that about 18% of the approximately 30 million high-definition televisions shipped to U.S. dealers this year will have Web connectivity, up from just 4% in 2009.

These trends have already benefited Netflix, which has aggressively pushed its "Watch Now" videostreaming service over the past couple of years -- and seen its stock price periodically spike on rumors of a possible buyout from Amazon. Netflix's fourth-quarter earnings, posted last month, surged 52% from a year earlier as its video-subscription service surpassed 20 million customers.

The Amazon news comes after Netflix said Monday that it had reached an agreement with CBS(CBS) to add newer shows like "Medium" and "Flashpoint," as well as older series such as "Cheers," "Family Ties" and "The Andy Griffith Show," to Netflix's videostreaming inventory.

Shares of both Netflix and Amazon fell Tuesday, indicating that investors may be expecting either a price war or increased spending by both companies as they battle for digital-movie customers. Netflix shares fell 5.9% to $221.60, while Amazon.com shares declined 3.3% to $180.42.

"Any competition is unwanted," Wold says, "and could force Netflix to spend more on marketing or pay up for content they desire."